For more than five decades, the SEC’s “no admit, no deny” (NAND) settlement policy has served as an important script for its enforcement program. Under Rule 202.5(e) of the SEC’s Rules of Practice, defendants and respondents may settle enforcement proceedings without admitting the allegations only if they likewise do not deny them. In a recent decision, the Ninth Circuit Court of Appeals rejected a challenge to the SEC’s denial of a petition to eliminate the rule’s “no deny” requirement. The court did caution, however, that the rule does have outer boundaries.
The petitioners’ appeal broadly contended that Rule 202.5(e) is unconstitutional because it prohibits a defendant from publicly denying the allegations of a settled SEC complaint or administrative order. The court noted that the petition “maintains that Rule 202.5(e) is per se unconstitutional” and concluded, therefore, that the petition is “properly analyzed as a facial challenge.”
The court recognized that substantial First Amendment concerns would likely exist if the SEC utilized the rule “to prevent criticism of the agency, its officers, or its enforcement programs” but found instead that the petitioners’ challenge was an assertion that the First Amendment is violated when a defendant agrees on a “voluntary basis not to deny the allegations against them in return for the SEC agreeing to settle” its case. The court rejected this challenge, however, finding that the “law has long regarded the voluntary relinquishment of constitutional rights as permissible,” and concluded that Rule 202.5(e) is not facially invalid.
The court also observed that the SEC’s remedy in connection with a defendant’s breach of an NAND consent judgment did not include restraint on speech: “And, critically, the consequence for violating the Rule is not speech suppression or the automatic undoing of the settlement agreement, but only that the SEC may seek to reopen the civil enforcement proceedings.” In other words, the SEC could not reopen the proceedings without the court’s approval, and, in any event, the SEC had no power to ask the court to restrain a defendant’s speech.
The Ninth Circuit’s upholding of the SEC’s long-standing settlement policy has potential benefits for both the SEC and defendants facing enforcement actions. First, the SEC continues to have access to a tool that allows it to efficiently manage its docket and free up scarce resources that otherwise might be consumed by protracted litigation. Without Rule 202.5(e), the SEC in some cases will confront more difficult choices. For example, the SEC may not want a notorious fraudster to settle a case and then publicly proclaim that the SEC’s allegations were meritless. If the SEC were dissatisfied with the possibility of this outcome, then it would be forced to take more cases to trial and potentially diminish the depth and scope of its enforcement program. Second, this decision continues to provide defendants with an off-ramp from enforcement actions that does not include an admission. Admissions in SEC enforcement cases are potentially problematic for defendants because of collateral consequences in related civil securities lawsuits or parallel criminal actions. In addition, NAND settlements also provide defendants with a path to avoid costly and distracting litigation.
